The pandemic is a black swan event that will send reverberations -- many yet unknown -- throughout the global economy: The U.S. gross domestic product in the second quarter could drop as much as 25% by some forecasts and some economists forecast double-digit unemployment through the end of 2021. Individual countries will recover at their own pace, just as they adopted subscription services at different rates, with government assistance and planning playing varying roles.
But how will this all affect music streaming? Based on Universal Music Group’s positive first-quarter earnings released April 20, so far the business looks steady and it looks like Spotify won’t be delivering any surprises Wednesday. UMG owner Vivendi said the coronavirus pandemic has had a “limited impact” on its earnings, most likely from a decrease in physical sales and not subscription revenue. While UMG’s streaming revenues for recorded music dropped 1.4% in Q1 2020 from the previous quarter, they had a similar 1.3% decline a year earlier.
On Wednesday, expect to hear Spotify executives reiterate positive talking points throughout the call. Some useful information will be plain to see; other information will be pried away by analysts. In any case, the music industry should be looking for clues on what to expect in the coming months and years.
Here are six things to look for in Spotify’s Q1 2020 earnings release:
1. Subscriber growth below 4%. Subscriptions should not drop from the previous quarter, even considering the pandemic’s effects; Italy, the hardest hit of European countries, didn’t implement a national lockdown until March 9. In the United States, businesses didn’t start closing until counties in Northern California’s Bay Area imposed the country’s first stay-at-home orders on March 17.
Subscriptions have increased 4%, 9.7%, 4.6%, 8% and 4.2% in the last five quarters, respectively. But growth under 4% would put subscriptions below 129 million, the mid-point in the company’s first-quarter guidance of 126 million to 131 million subscribers. If the March tally fell below the bottom end of guidance, it could mean the pandemic is having a greater-than-expected impact. There have already been clues suggesting this consumers will pull back: on Tuesday SiriusXM Radio revealed it added 69,000 paying subscribers in the first quarter compared to 132,000 a year earlier, in part because “customer responses to marketing campaigns...fell swiftly,” CEO Jim Meyer said Tuesday.
Some market research suggests subscription counts will hold up during the pandemic: MusicWatch has found that services’ ease of use and breadth of catalog -- and not price -- are the key factors that drive subscription demand. As long as consumers value features over price, subscriptions will help insulate the music business from a prolonged recession.
2. Commentary on long-term trends. What happens in the first quarter isn’t as important as what happens in the rest of the year after the economy slows. Spotify is undoubtedly thinking through different scenarios and building game plans based on varying market conditions: Does Spotify believe people will change how they listen to music once stay-at-home orders are lifted and people return to school and work? Will higher unemployment hurt subscription growth? How does Spotify see the stoppage in live music affecting its business? Don’t, however, expect clarity on Wednesday -- a publicly-traded company can (and will) typically only reveal as much as it has to.
3. April subscriber and listening data. Spotify has had almost the entire month of April to assess the pandemic’s influence on long-term trends. This financial data will cover only the first quarter, but companies often share up-to-date information for the interim period -- especially if the news is good. Analysts are sure to ask for additional information during the Q&A session. Streaming data from MRC Data show U.S. on-demand audio streams returned to normal after a small dip at the end of March-to-early April.
4. Changes to 2020 guidance. Spotify’s previous guidance for full-year 2020 was 143 million to 153 million subscribers and revenue of $8.75 billion to $9.18 billion (€8.08 billion to €8.48 billion). Spotify typically lands within its guidance without surprises, but the world has changed drastically since first quarter results were released three months ago, with key streaming regions in Western Europe and the U.S. heavily affected by the pandemic. Changing or withdrawing guidance wouldn’t necessarily be negative but would indicate uncertainty has clouded Spotify’s outlook. While financially sound, SiriusXM Radio withdrew 2020 guidance when it released its first quarter earnings Tuesday. “We do not know what the shape of a recovery from this current crisis will look like,” admitted SiriusXM CEO Jim Meyer. Even so, Meyer added the company “will continue to generate substantial positive free cash flow.”
5. Home listening numbers. Amazon’s Echo smart speaker gives it the best position in the category. With much of the world under shelter-in-place orders, entertainment is being consumed at home more and on-the-go less. Trends could reverse once businesses open and people start to return to their normal routines, but any indication that Spotify is underperforming at home can have implications for future growth.
6. Changes in what music people are listening to. U.S. streaming trends show consumers are finding comfort in classic songs during the pandemic. Record labels have seen increased activity in niche genres such as jazz, classical and even holiday music. Listeners are spending more time with children’s music -- a hint that streaming services are helpful for stressed parents at home with children -- and ambient music. At the same time, people are not listening longer, so the most popular music has been getting a smaller share of listening. The key question is how far these genres’ trends will reverse once people can leave their homes.
Spotify’s guidance for the first quarter and Billboard’s expectations:
- 126 million to 131 million subscribers. Billboard expects the number to fall at the low end of this range.
- 154 million to 162 million ad-supported listeners. Billboard expects the number to fall within this range.
- 279-289 million monthly active users. Billboard expects Spotify to hit the low end of this range.
- $1.85 billion to $2.07 billion (€1.71 billion to €1.91 billion) total revenue. Billboard expects revenue to land in the middle of this range. Spotify’s revenue tends to increase by rates similar to -- but not equal to -- Universal Music Group’s subscription revenue. In first-quarter earnings released last week, Universal showed a -1.4% change in subscription revenue from the fourth quarter of 2019, an amount that suggests Spotify’s fourth quarter revenue could stay flat at around $2 billion (€1.855).